SEC Acts to Put into Effect Provision of JOBS Act that Allows General Advertising and Solicitation in Securities Offerings

Last week, the SEC proposed rules that would get rid of the ban against general advertising and solicitation of certain securities offerings under Rule 144A and Rule 506 of Regulation D of the Securities Act. The rules are mandated under the Jumpstart Our Business Startups Act.

Currently, companies that want to raise money through securities sales have to depend on an exemption from registration or register the offering with the SEC. The majority of the SEC’s exemptions from registration, including Rule 506, don’t allow companies to take part in general solicitation/advertising related to the securities offering.

However, the newly enacted JOBS Act mandates that the Commission take away the general advertising/solicitation prohibitions on securities offerings related to Rule 506. Section 201(a)(1) of the JOBS Act even directs the SEC to amend Rule 506 to allow general solicitation/advertising as long as the buyers of the securities are investors that are accredited. It also says that the rules shall make sure the issuer exercises reasonable steps to confirm that the buyers are accredited investors and that it is up to the Commission to determine what these methods would be.

Also, SEC has to modify Rule 144A. This rule presides over the reselling of securities mostly by qualified institutional buyers, who are the bigger institutional investors. Under the current version of this rule, securities offers can only be made to QIBs. With the new rule, securities offers would be able to be made to investors that aren’t QIBs as long they are only sold to those the sellers have reason to believe are QIBs.

Under the rules being proposed, companies that issue securities could engage in general advertising/solicitation to offer them as long as they have taken steps that are considered reasonable to confirm the buyers are accredited investors because they either fall under the person categories that are considered accredited investors, per Rule 501, or when the securities sale is taking place, the issuer has reasonable grounds for thinking they fulfill one of the categories

The SEC’s proposed rule would preserve parts of Rule 506 that exist as a separate exemption. This would let companies involved in 506 offerings without general advertising/solicitation to not have to abide by the new verification rule. It would also amend Form D, which have to be filed by issuers with the SEC when the securities being sold are under regulation D. The form would have a box that issuers would check when claiming the new Rule 506 exemption would allow for general advertising/solicitation.